Big profits in not passing on rate cuts

BusinessDay editor

ANZ and Westpac stand to generate the biggest profits from their mortgage customers by being the slowest to pass on cuts to interest rates.

Combined, the two banks are expected to net some $53 million in interest income, as they take as much as two weeks to lower variable home loan rates after the Reserve Bank cut the official cash rate last Tuesday.

While ANZ has broken ranks with its rivals, announcing its rate cut the second Friday of each month, the move also provides a financial pay-off by delaying the date from when its customers receive the benefit of lower rates.

ANZ has said it will confirm its position on interest rate pricing this Friday.

According to JPMorgan analyst Scott Manning, each of the major banks ''makes somewhere in the order of $2 million each day that it does not pass on the rate cut''.

With ANZ traditionally taking about seven days after its rate announcement to actually pass on the lower rate to customers, this means borrowers will have to wait 17 days until they see any benefit of a Reserve Bank cash rate cut.

Mr Manning calculates ANZ is likely to generate $25 million in additional earnings while it delays passing on rate cuts.

Westpac, another bank that is traditionally slow to pass on rates, is set to generate $28 million over the 13 days it will take to pass on the December rate cut. Westpac has a higher headline mortgage rate than rival ANZ, which means it generates more in interest income over a shorter period.

Commonwealth Bank and National Australia Bank are much quicker passing on this month's cash rate adjustment to customers - taking just six days. Even so, this gap still generates $14 million in interest income for CBA and $11 million for NAB, Mr Manning estimates.

Regional lender Bendigo Bank is among the slowest of the banks to pass on interest rate cuts, taking up to 20 days between the official rate cut and giving the benefit to its mortgage customers.

In its outlook for Australia's banking sector, ratings agency Moody's said banks were increasingly using ''pricing power'' as one measure to help maintain profits in the face of a low credit growth environment.

Top executives from both National Australia Bank and Westpac are expected to defend their interest rate strategy when both banks front shareholders this week.

Westpac is scheduled to hold its annual meeting in Sydney on Thursday. National Australia Bank also meets on Thursday, in Perth.

NAB is expected to outline whether it will extend its commitment to have the lowest interest rate of major banks into the new year.

Online banker ING Direct is so far the only lender to pass on the full 25 basis point interest rate cut, with most banks opting to pass on just 20 basis points.